With the recent dip in interest rates, the urge to refinance is in the air.
But before you go running to your bank to secure that million-dollar line of credit for your business, or even look into a personal loan, consider a peek at your credit rating.
People often take for granted that the information on their credit reports from the three credit reporting agencies is accurate, explains Matt Hollis, a partner at Summit Financial, one of four state-licensed consumer credit organizations in Ohio. But more often than not, one or all of your credit reports contain critical and inconsistent errors.
”If we were to pull your three credit reports and look at all of them, there may be a score of 600 on one, a 650 on a second and a 700 on the third,” Hollis says.
While that may not sound like a very wide swing, your credit rating may be more important than you realize. Your credit rating is like your SAT score: Colleges may consider other factors for admission, but that scores is really the driving force. The same holds true for underwriters.
”A business owner may make $500,000 a year and have a million dollars in the bank, but neither his income or his assets are listed on the credit report,” says Hollis. ”The fact that he makes that kind of money or he has those sorts or assets does not necessarily improve his credit score.”
Hollis and his partners, David Waltz and Tim Marotta, recommend pulling all three reports at least once a year or certainly prior to getting in front of a bank or other lender. The problem, Hollis admits, is that ”these reports come in hieroglyphics — they are not that easy to understand.”
But all is not lost, says Marotta. If you find mistakes in your credit report, you often are able to correct them.
”There is not a lot of personality to credit reports,” Hollis says. ”But the law protects consumers. It says if there are mistakes on the credit reports that (people) can notify the credit bureaus. Within 30 days (the credit bureaus) have to investigate the disputes and resolve them.”
As a credit service organization, Summit does just that for its clients. Hollis and his partners formulate personalized plans aimed at improving credit ratings.
The owners of small- to mid-sized companies are especially at risk.
”(Often) they will sign something and personally guarantee a debt,” Hollis says.
This can be compounded if the owner uses a personal credit card to finance a building or expansion project. And, if the bank sees that someone has a line of credit for $500,000 or more, they will question why that person needs more credit.
There are numerous other credit traps a business owner can fall into. One example is high balances on credit cards due to delayed reimbursement for business expenses.
”If you have a credit card with a limit of $2,000 and your balance is $1,900, your credit score is going to be lower because you are perceived as overextended on your credit,” Hollis says.
The rule of thumb is to keep cards below 70 percent of the limit.
Another common mistake is cutting up a credit card after you’ve paid it off. Waltz likens it to committing financial suicide. Credit scores are in part based on longevity of credit. It is better to keep a card with a zero balance than cancel all your credit.
Correcting mistakes, refinancing personal debt to corporate debt or re-establishing credit can have a profound effect on an individual’s score.
Says Hollis, ”It depends what we see on their credit reports, but on average, we can raise a person’s credit score 50 points. That is very significant. It can be the difference between being denied a loan or getting a loan, a sub-prime loan and a prime rate loan. We could be saving them four percentage points.” How to reach: Summit Financial, (216) 283-1650 or www.auditmycredit.com
Kim Palmer ([email protected]) is managing editor of SBN Magazine.
There have been recent complaints about credit repair companies that claim they will remove bad credit for a fee. Matt Hollis, a partner at Summit Financial, says not only is that impossible, it is illegal.
”Intuitively that should strike you as preposterous,” he says. ”If someone is promising to remove accurate information from your credit report, they are lying to you.”
However, Hollis says you can correct mistakes on credit reports if you know what to look for. Here are some of the most common problems:
* Erroneous collection accounts or old bills, judgments or tax liens that have been paid that aren’t reported.
* Credit cards you don’t know about.
* Bankruptcy accounts that are not listed as discharged.
* Commingling. Occasionally, a person whose name ends in Jr. finds his files mixed up with someone whose ends with Sr. Or a man’s files are commingled with his ex-wife’s. Even common names lumped together in the same file can cause trouble. Source: Summit Financial